Service Charge: Deductions And Apportionment In The Last Year Of A Lease

Service charge paid in respect of anticipated works

In the Friends Life Management Services Limited case [2014] EWHC 1463 (Ch) it was the tenant of certain floors and the car park in an office building where it paid service charge calculated by deducting the annual expenditure from the gross annual expenditure.

Gross annual expenditure was defined as the aggregate of:

fees, expenses and outgoings due to the landlord, A & A Express Building Limited, during the current financial year; fees, expenses and outgoings incurred in previous years which had not already been taken into account; and a provision in respect of major works which were anticipated by the landlord in future years. Annual expenditure was defined as all costs incidental to the services provided to the tenant or recoverable from the tenant.

Over the term the service charge came to a total of £875,000. At the time of the determination of the lease the tenant had paid £795,112.50.

Break clause

On 24 March 2010 on the expiry of the 12th year of the term the tenant ended the lease by serving a break notice to accord with the break option. At this point the major works which were anticipated in the gross annual expenditure had not been carried out. The works began in September 2010 with the majority of the work being completed in 2011. The tenant sought an apportionment of the service charge for 2010 and reimbursement for the excess sums paid in relation to anticipated works for the time when it had already vacated the building and was not going to obtain any benefit from the completed works.

The court identified three specific accounting stages for computation of the service charge in the lease on an annual basis:

collaboration between landlord and accountant for preparation of certified accounts showing, for a relevant financial year, the amount of the gross annual expenditure, the amount of the annual expenditure and a summary of the relevant expenditure; apportionment of the annual expenditure in relation to the premises and of the annual expenditure in relation to the car park; and comparison between the amount of the service charge for the financial year and the amount of the provisional sum for that financial year. The tenant's case was that it wanted only to pay for actual moneys incurred whilst the lease was in place and not have to pay for the charges that had accrued after it had vacated.

It was decided that the tenant was liable only to pay service charge in the...